The Two Biggest Drawbacks or Disadvantages of Unrelated Diversification Are

question 35

Multiple Choice

The two biggest drawbacks or disadvantages of unrelated diversification are:

• A) the difficulties of passing the cost-of-entry test and the ease with which top managers can make the mistake of diversifying into businesses where competition is too intense.
• B) the difficulties of capturing financial fit and having insufficient financial resources to spread business risk across many different lines of business.
• C) the demanding managerial requirements and the limited competitive advantage potential that cross-business strategic fit provides.
• D) ending up with too many cash hog businesses and too much diversity among the competitive strategies of the businesses it has diversified into.
• E) the difficulties of achieving economies of scope and conflicts/incompatibility among the competitive strategies of the company's different businesses.

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Definitions:

Full Fair Value

An approach within certain valuation and accounting frameworks where assets and liabilities are recorded at their full market value.

Proportionate Consolidation Method

An accounting method where an investing entity records its share of the assets, liabilities, income, and expenses of an associate or joint venture.

Assets and Liabilities

Assets are resources owned by a company expected to provide future benefits, and liabilities are obligations a company owes to outside parties.

Fair Market Value

The price at which an asset would change hands between a willing buyer and a willing seller, not under compulsion and both having reasonable knowledge of the relevant facts.